The emergence of the AIIB in the context of current multilateral development cooperation

by Thomas Otto

After becoming an important global creditor of foreign direct investment, China now also takes a leading role in multilateral development cooperation by establishing a new multilateral development bank (MDB), the Asian Infrastructure Investment Bank (AIIB). This step, as I will argue, is not taken by chance but is a reaction to the existing problems of MDBs’ lending activities in Asia. The establishment of the AIIB begs the question in what way China tries to transform current multilateral investment in Asia.

In this article, I will try to give a broad answer to that question by first outlining the current problems of the established MDBs’ lending activities in Asia and, secondly, describing how China reacts to these problems. Thirdly, I will give brief recommendations on how the established MDBs may adapt to and cooperate with the AIIB.

One of the most pressing problem for South and Southeast Asian economies at the moment is a yawning gap between the required investment in infrastructure to maintain the current economic growth in the region and the actual investment, first and foremost provided by the established MDBs and Japan (Ruiz-Nunez/ Wei 2015; Dollar 2016, 212). Developing countries in South and Southeast Asia require about $516 billion investment in infrastructure annually to sustain their economic growth (ibid.).

At the same time, the MDBs’ infrastructure investment is declining since the 1980s. This is to a great extend due to the shift of MDBs’ focus away from investment in heavy infrastructure to the establishment of environments favorable for investment, featuring aspects of good governance, appropriate legal frameworks, accountable bureaucracy, and democratic values (Weiss 2017, 4). The result was that the loans provided by the World Bank (and later also by the ADB and other MDBs) were tied to demanding conditions, which the recipient countries were often unable to meet. Especially the World Bank’s safeguards regarding environmental assessment and involuntary resettlement, which are often applied in projects about energy, transportation, and urban development, are particularly demanding (Dollar 2016, 205). In addition, the World Bank is known for being quite risk-averse in its decisions on which projects to fund, which means that more risky but nevertheless important projects are burdened with additional studies beforehand at the expense of the borrower. All this makes current MDBs’ provision of loans costly, slow, and cumbersome to an extend that is unfeasible for developing countries. Consequently, most governments turn away from the established MDBs and look for other sources of capital (Dollar 2016, 211).

This is where China’s relatively new investment in infrastructure projects in Asia comes into play. In contrast to the World Bank’s loans, China’s investments are generally considered flexible and less bureaucratic (Dollar 2016, 206). Furthermore, China assures non-interference in domestic political affairs, which the cases of countries in Central Asia (Smith-Stegen 2015) and on the Balkan Peninsula (Mackocki 2017) exemplify. “So far, China has been reluctant to subscribe to any international standards for environmental and social safeguards. Its position is that it follows the laws and regulations of the host country” (Dollar 2016, 204).

With by far the biggest share of voting power in the AIIB’s Board of Directors (28 per cent), China can strongly influence the bank’s policies and can effectively veto major decisions (Weiss 2017, 9). Despite the AIIB’s decision-making structure being similar to those of other MDBs, the member countries located within the region have more voting power than non-regional members of the AIIB, with the latter’s voting power being capped at 25 per cent (Weiss 2017, 9). This measure is supposed to strengthen the voices of the regional recipient countries vis-á-vis those of developed lenders.

It can be expected that the AIIB will focus on providing quick and “no-strings-attached” capital, as China already does with its foreign direct investment. Even though the AIIB has incorporated environmental and social policies similar to the World Bank’s safeguards, it has not been explicit about how these policies are to be implemented (Dollar 2016, 207).

How should the World Bank, ADB, and other MDBs react to the emergence of the China-backed AIIB? First of all, the established MDBs should reassess the requirements they attach to their loans and financial services. Having very ambitious demands on important issues such as sustainability, good governance, and social security do not benefit anyone, if they result over-demanding the recipients’ capabilities and, ultimately, in failing to provide loans at all. South and Southeast Asia needs a large amount of investment to maintain its current economic development and it should be provided in a way suitable for local conditions. Therefore, it will be crucial to make it easier for the recipient states in Asia to meet those requirements by accelerating the lending process, relaxing attached conditions, and making it less bureaucratic.

Secondly, the World Bank should reconsider its reluctant attitude towards more risky infrastructure projects that could greatly benefit the region. Simply loading the burden of risk assessment on the back of the recipient country contradicts the initial motivation to assist the latter with its economic development. Especially for risky projects, the local institutions and companies need additional consultation and a multilateral bank that covers their back.

Thirdly, the MDBs should intensify their cooperation with the AIIB to ensure that certain environmental and social standards are met in Asian developmental cooperation. This way the MDBs can try to implement their social and environmental regulations and find a way back to their previous investment in Asian infrastructure.

Finally, the US and Japan, the leading powers of the established MDBs in Asia, should strongly consider joining the AIIB to influence its future policies and strategies, as Germany and France already do. If the US and Japan are indeed genuinely interested in the promotion of good governance, environmental protection, and sustainable development, promoting these goals within the soon probably most important creditor in the region might be a prudent step.

A strong demand for investment in South and Southeast Asian infrastructure combined with the established MDBs’ loans being highly unattractive for developing countries created a welcoming environment for flexible, less bureaucratic, and non-interventional capital the newly established AIIB seeks to provide. The World Bank and other multilateral development banks will have to revise their own lending conditions and to seek further cooperation with the AIIB, if they wish to keep playing an important role in Asia’s regional economic development.


Dollar, David (2016): China as a Global Investor. In Ligang Song, Ross Garnaut, Cai Fang, Lauren Johnston (Eds.): China’s New Sources of Economic Growth: Vol. 1. Reform, Resources and Climate Change: ANU Press.

Karen Smith Stegen; Julia Kuznir (2015): Outcomes and strategies in the ‘New Great Game’: China and the Caspian states emerge as winners. In Journal of Eurasian Studies 6, pp. 91–106.

Makocki, Michael (2017): China in the Balkans: The battle of principles. In ECFR. Available online at

Ruiz-Nunez, Fernanda; Wei, Zhichao (2015): Infrastructure Investment Demands in Emerging Markets and Developing Economies. World Bank, Policy Research Working Paper 7414, Washington DC.

Song, Ligang; Garnaut, Ross; Fang, Cai; Johnston, Lauren (Eds.) (2016): China’s New Sources of Economic Growth: Vol. 1. Reform, Resources and Climate Change: ANU Press.

Weiss, Martin A. (2017): Asian Infrastructure Investment Bank (AIIB). In Congressional Research Service.